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spk01: Good afternoon, and thank you for joining us for Mollis & Company's fourth quarter and full year 2023 financial results conference call. On the phone today are Ken Mollis, Chairman and CEO, and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements which are subject to various risks and uncertainties, including those identified from time to time in the risk factor section of Mollis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable gap measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant gap financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our investor relations website at investors.mullis.com. I will now turn the call over to Joe to discuss our results.
spk08: Thanks, Matt. Good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will comment further on the business. We reported $215 million of revenues in the fourth quarter, an increase of 6% versus the prior year period. For the full year, our adjusted revenues of $860 million were down 11%. The revenue declines were driven by a decrease in fees earned from M&A, partially offset by an increase in restructuring and capital markets fees. Regarding expenses, our full-year compensation expense ratio is a little less than 83%. As a reminder, our first quarter compensation ratio will likely be elevated as a result of retirement eligible awards, which are expensed at the time of grant. For the full year, we reported a non-compensation ratio of approximately 21%. As a result of our MD headcount expansion, underlying non-comp expenses will be in the 45 to 46 million range, beginning in the first quarter, excluding transaction-related expenses. As many of you know, the annual vesting of RSUs will occur later this month. For purposes of quantifying the excess tax benefit, we expect the impact to EPS to be approximately one cent for each $1 difference between the vesting price and adjusted grant price of $39 a share. Regarding capital allocation, the board declared a regular quarterly dividend of 60 cents per share, consistent with the prior period. And lastly, we continue to maintain a strong balance sheet with 349 million of cash and no debt. I'll now turn the call over to Ken.
spk02: Thanks, Joe. Good afternoon, everyone. While 2023 was a challenging year, we played strong offense and aggressively expanded our business. During the year, we hired 24 and promoted eight managing directors. Many of these new MDs are focused on the most significant global feed pools, including technology, industrials, and our clean technology group. While we expanded our new MD population by approximately 20% during the year, our total employee headcount grew just under 5% as we actively managed our headcount. In early 2024, we promoted seven bankers to MD and have hired three. One hire enhances the firm's coverage of credit funds, and two managing directors will join in the coming weeks are focused on upstream energy. While we will selectively add talent in areas where we see meaningful people opportunities, this year we expect to be primarily focused on delivering our expanded expertise to our clients. It's difficult to predict when the M&A environment will fully rebound. However, the Fed's messaging has eliminated the tail risk of future rate hikes. and brought into view a high probability of rate cuts in the coming year, which I would believe will give rise to an increase in M&A activity. We're seeing early signs of an improvement in sentiment, as expressed in our pipeline, which is near record levels at the beginning of the year. Barring unforeseen events, I'm confident that we have seen the bottom of this M&A cycle and that we have positioned the firm well for the coming uplift. With that, I'll open it up for questions.
spk10: Thank you, Mr. Mollis. Ladies and gentlemen, if you would like to ask a question today, you need to hit star followed by the number one on your touchtone keypad, and we'll take your question in the order in which it was received. Our first question is from the line of Devin Ryan with JMP Securities. Your line is live.
spk09: Great. Good evening, Ken and Joe. I guess just want to start on the sponsor backdrop. Clearly, very challenging market in 2023. I think sponsors have their slowest year of announcements since 2013. So just love to get your thoughts on what do you think a recovery for sponsors could look like? Do you think it's going to be a slow build? Do you see it snapping back? and just really how you see it developing maybe in the next two years relative to 2023. I appreciate you're now in some sectors like technology in a bigger way as well, so potentially get a bigger snapback. I'd just love to get some thoughts there. Thank you.
spk02: I think it'll be somewhere in between and depending. Again, I think rate cuts, when they happen, will trigger a ramp up in whatever speed you're asking me to handicap. And I think the actual... event of of a rate cut and the beginning of that will provide a tailwind but again devin i'll take you back you know i think the world changes so fast these days i think sometimes we forget that within the last four or five months we literally had um the head of ceo of one of the major banks in the country telling the uh community that nobody's ready for a seven percent federal funds rate and they have to be ready for it it's a possibility We had one of the largest and most vocal hedge funds short the 30-year Treasury. This was, you know, in October, I think, early October, and saying that, you know, the theory was Treasury had to print so much paper and there was no way rates were going the opposite direction. And today, there is none of that conversation. It is all about how low, how quickly and how fast we go the other direction. Almost everything Nobody's talking about the tail risk of high rates. And I do think that will promote deal activity very rapidly. I don't think the difference between a March or a June or a May or when rate cuts actually happen will have less impact than the fact that I believe the vast majority of the community believes they will happen and that what we won't face is a 7% fed funds rate that could that could destroy a deal that you entered into in the back half of last year. So I think it'll start. We see it right now. It is building. I think most people are trying to use their best judgment as to when exactly to hit this market. And again, the private equity community is much more sensitive to timing their entrance and their exit into M&A than strategics are, who are mostly investing for the long term. So, look, I think, long answer, but I think we will start to build from here gradually. And then I think it was, I forgot the famous one that said, we'll go gradually and then rapidly. I think that was in relation to bankruptcy, so I shouldn't use that analogy. But I forgot who said first, we'll start out gradually and then it'll move rapidly.
spk09: Yep, I understand. Thank you. And just follow up on the other business and restructuring. Yeah, obviously some optimism around, I think, the resilience and restructuring and doing that through numerous earnings calls. You guys noted a year-over-year increase in the press release in that business. And so... um obviously 2023 had pockets of strength but it felt like the mandates were building and so therefore you know there should be some acceleration in revenues in 2024. so i just i just want to kind of get a sense of how you're thinking about the trajectory of restructuring and then perhaps you know your comment on m a you know the fed starts cutting how that could accelerate M&A and maybe more than people think. Do you think that the Fed cutting could actually surprise people on kind of the fall off in restructuring just as kind of conditions loosen and, you know, it's a better environment? Or do you just think that the maturity walls and just a high absolute level of rates is the biggest driver? So I just want to drill in there a little bit. Thank you.
spk02: Going into the year, we have, we think restructuring will be up and, yeah, Because of the size and the scope and how long and the impact of interest rates, higher interest rates on a long period of time. But look, if the Fed were to cut and begin to cut aggressively, I do think that that would, it cuts off a part of the restructuring market. Look, that's why we built up capital markets so strongly. Most restructurings in this market are very close to being financings. It's a matter of liquidity in the market, terms, outlook on financials. But there is nobody in the market who wouldn't rather do a financing than a liability management exercise or a restructuring. So, yes, the speed and the aggressiveness with which the Fed addresses the market would definitely change the outlook for restructuring. I still think there's a fundamental amount of – companies that are under pressure, interest rate pressure. But I think it would do a lot to damage the maturity wall if the Fed actually began, you know, a whole series of things like, you know, right now we have a quantitative tightening. So they could do a bunch of things that would just make credit available and push out a lot of that wall.
spk09: Yep. Understood. Okay.
spk10: Thanks, Ken. I'll leave it there. Thanks for your questions. Our next question comes from the line of Ken Worthington with J.P. Morgan. Your line is live.
spk05: Hi. Good afternoon. Thanks for taking the question. Maybe for Joe, I wanted to dig into the compensation ratio and how Molus' compensation could react to different environments. So Molus generated about $860 million of revenue last year at compensation of 7-11. How clean is that 7-11? So you did a lot of hiring throughout the year. If you generated $860 million of revenue, again, I guess maybe first, what does comp look like in that environment for 24? And if the environment improves and revenue goes higher, how much of the incremental revenue actually gets paid out in compensation from here? So if you make another million dollars of revenue, how much goes to employees? How much goes to investors? And we'll start there.
spk02: Joe, I think you've been doing some work around that, so I'll let you go with that.
spk08: Yeah, so I think the best way to think about it is I'd say for every $100 million increase in revenue from the 860 starting point, we're looking at kind of four to five points of comp leverage. So in other words, if we go from 860 to 960, I would imagine that 83 would turn into 78 to 79. And that progression would just happen, you know, along that, along that route until we got to kind of 60 area, at which point, you know, I don't think it goes much around. It doesn't go beyond that.
spk05: Okay, great. Perfect. Thank you. And then just, again, another simple one for you, Joe, um, On the balance sheet, what was the compensation payable at the end of the year, and then how much of that payable is satisfied in cash?
spk08: Well, the compensation payable is satisfied in cash. I don't have that balance at my fingertips, but that will be in the K in the next couple of weeks. Okay, great. Thanks. That's all for me.
spk10: Our next question is from the line of Brennan Hawkin with UBS. Your line is live.
spk07: Hi, good evening. Thanks for taking my questions. Would love to hear, you touched on this a little bit in the prepared marks in giving a little texture about restructuring, but is it possible to get the breakdown of advisory revenue for 2023 and the fourth quarter as far as restructuring and capital markets and how much that represented?
spk02: I'm thinking of a full year, I think, Brandon, that it's been in the mid-30s. Well, let me say this. We tend to think of capital markets and restructuring as a – we put them together because I think, as I said, if you can move a restructuring into a capital market, you haven't failed. You've succeeded for your client, and that is really the goal, just to refinance debt and move it out. I think restructuring has been in the mid-20s, and I think combined they've been in the mid-30s. And I believe that might be an annual number though.
spk08: Yeah. A little higher than the mid thirties, but that's, that's, you know, directionally right.
spk07: Mid thirties in 2023. Yeah.
spk08: It's combined. So, you know, 25 area for restructuring, you know, 10, maybe 12% on the capital market side combined kind of 35 to 37.
spk07: Got it. Okay, great. Thanks so much for that. And, um, Joe, in your comment on the comp leverage, which was helpful texture, thanks for that. You indicated that bring it down to 60 and then stay there. Ken, when you went public, the general idea was that long-term target for comp was 57 to 58. Is that now adjusting and now the new general standard or normalized level is more like a 60 number, or is it that for the next few years, given the quantum of recruiting you've done, it's just going to be a little more elevated and it might take longer to get down to that high 50s?
spk02: No, I think what Joe said that it was our feeling, and we'll see what happens, Brennan, but there's been... fairly large inflation in the non-managing director, you know, base go to mark, but base run the company, uh, vice presidents associates. So I, I think our view is that might've eaten up a point or two of your overall, um, ability on comp ratio. Um, but again, we're, we still think we managed to a pre-tax margin that, is 25 or better that's what we're really aiming for but we'll see what the competitive environment is and what's out there but i will tell you that it you know we there was significant inflation in the in those ranks and as you know inflation is hard to get you know it doesn't come back quickly you know get rid of it right fair enough okay thanks for the color thanks for your questions
spk10: Ladies and gentlemen, once again, if you would like to ask a question tonight, it is star followed by the number one on your telephone. Our next question is from the line of James Yarrow with Goldman Sachs. Your line is live.
spk00: Good afternoon, Ken and Joe, and thanks for taking my questions. Maybe just turning to the senior banker base quickly, I think your net MDs were actually down by four sequentially. Maybe you could just talk about You know, what drove the sequential step down and then, you know, the three hires year to date. But I think you also commented that, you know, it's more about, you know, bringing out your existing capabilities to clients. So maybe you could just help us understand, you know, what the hiring backdrop is for 2024. I assume it will be substantially slower than in 2023.
spk02: I'm surprised that our net MDs are down. I don't have it right in front of me.
spk08: Well, it's actually, Ken, this is all about, you know, there were a number of folks who were leaving. You know, some of the actions took place in the first half. They leave in the second half. And so the net change between the third quarter and the fourth quarter was slightly down.
spk02: Oh, okay. Sorry. I thought it was, I thought you were doing year over year. Sorry. Quarter over quarter. Sorry. That does make sense. So look, we, we spent a year, um, and we, we did it quietly, but we aggressively hired and we aggressively managed. I think a lot of people, um, you know, we're talking about managing their head count. We were doing it. I didn't see any reason to be extremely chest pounding about it. We just did it. So we did, uh, there was a substantial change. Um, You were talking about the hires for the new year in 2024. Two of those are upstream oil and gas, which I think will continue to be a significant market. Lots of activity. We're very happy about that team, which is a place we have not played much. And then this credit fund person, again, this goes to the rise of private credit, both as a supplier to deals, a generator of deals, and possibly restructuring in the future. So we thought a dedicated coverage of that environment, given its growth, I think this is the first time we'll actually have a dedicated banking coverage of private credit. For the rest of 2024, we'll be opportunistic. Look, there's always places that we are going to need higher. We might have levers, so we might have to respond to that. But And there are also places where we would like to expand if the right situation happened. But I do think, given what we did in 2023, this is the year we should deliver this expertise and focus on the client and get out there and show you what we've done. I think we've done a great job of expanding the expertise we have. I think we've addressed some markets that we had a difficult time, like technology, finding the right moment and the right method to build our expertise. And I think this is the year that we're going to focus on that, delivering these services to the client.
spk00: Okay, that's very clear. Thank you. So you did build another roughly $50 million of cash and short-term investments this quarter. So I'm going to ask a question that's quite different than what you were getting just one or two quarters ago. But What is the level of earnings or perhaps what you'd need to see in the macro backdrop that would prompt you to consider increasing capital return, especially in terms of the buyback?
spk02: Thank you for that. That's the first time I've been asked that question in 24 months. That's an exciting question to be asked. So, look, again, we haven't spent much time on that given the market we're in. But I think given our history, you've seen – as soon as we get above a certain level of cash and a market that we're comfortable with, we will return the capital. We've done it aggressively in the past. I don't have an exact, you know, I suspect again, three to five months post the first rate cut in my mind is when I think we'll be at a run rate of 25% pre-tax. I think again, this calendar year is very difficult because you have a tale of two markets. You have the market that I was talking about, the deals that were trying to be created into that environment of people saying that there's a 7% Fed funds possible. But as of now, we don't have that. And then when it kicks in, and I think it's a good question. We haven't spent a lot of time worrying about how high is up and what we'll do with the capital, but I can guarantee you we'll return it to the shareholders as soon as we're comfortable that it's accessed.
spk00: Very clear. Thank you so much.
spk10: Our next question is from the line of Steven Chuvak with Wolf Research. Your line is live.
spk03: Thanks so much. I guess echoing, you know, Brennan's comments on the complex sensitivity, Joe, that disclosure is really helpful. One of the pieces I was hoping to unpack is whether we should be contemplating that 400 basis point improvement. If we can underwrite that in a linear fashion, which would suggest the path to low sixties might require revenue generation across the franchise somewhere in the range of about 1.3 to 1.4 billion.
spk08: I think that might be, yeah, that, that sounds maybe a little high, but reasonable.
spk03: You believe you can get there with a lower revenue level?
spk02: Yeah. I think we can get there. Yeah, I don't know.
spk08: I think 1.3 areas is probably reasonable. Yeah.
spk02: I think, remember, some of our compensation does not fluctuate as linearly. So I think you're in the ballpark, but I thought you were a little high myself, too.
spk03: Okay, fair enough. The other piece is just on MD productivity normalization. And Ken, in the past, you've talked about various normalized productivity ranges, but just given a different composition of MDs, the significant hiring you've done this past year, what level of productivity do you believe is sustainable in a more normal operating backdrop?
spk02: Look, I agree with you. I think we have a better... Let's just say I think we've improved our MD and the pools in which they face. I mean, we were not facing technology in a size that matched every other place that we were facing off against the fee pools. And with the Silicon Valley Bank deal, we changed that pretty dramatically. Same with oil and gas right now, industrials. I think we've addressed some of the largest fee pools in the market. So I think we'll be more productive per MD. And then again, we haven't had a note, what you would call a normal year in a long time in M&A. And so again, I just looked at the, I kind of look at the last three years and say, if you kind of average them, we had an incredible spike in 2021. And then we had, I'd say 22 was less than optimal and 23 was well below optimal, but you got to put those together and do your average productivity off of that. I think we should be above that. And I think, again, we haven't had what I'd call a normal year in three years. So, you know, I don't know exactly what normal will be in a productivity. But I would, again, those three years kind of put together, divide by three might be a good way to think about it.
spk03: You know, it's helpful context. Now, I guess it's time to choose my own adventure, but I appreciate the color. Thank you both. Thanks for your question.
spk10: Our next question is from the line of Ryan Kinney with Morgan Stanley. Your line is live.
spk06: Hi, good afternoon. This is actually Connell Schmitz filling in for Ryan Kinney. First question on the comp leverage, just another detail there would be what level of MD hiring and overall headcount are you assuming in that 45% comp leverage per 100 million incremental revenues?
spk08: Yeah, I mean, it's kind of reverting back to a more normal pace than what we've seen in the last two years on the hiring front.
spk06: Got it. And then as it relates to SIVB, like this quarter in particular, any comments on how that affected the income statement as it relates to REVs and non-comp? And then just go forward on non-comp?
spk02: No. Are you asking about Silicon Valley Bank? Is that what?
spk08: Yeah, we don't break out any of that.
spk02: Yeah, I'm not going to break it out. I'll just say that it's been a – you know, we think it's been very successful, and the group has gotten off the ground. And the fact that it was a group, the fact that there wasn't a lot of downtime, they weren't on the beach for a long time. Again, it was not a great year, and the fourth quarter wasn't the – you know, you don't want to hold people to the fourth quarter, but we felt very good about the group and their – and their ability to produce.
spk06: I guess said another way, should we expect an incremental drop-off in non-comp as the transaction sharing agreement rolls off?
spk08: Well, again, what I described as pre-transaction was like the 45 area, and that would exclude anything on the SVB fee arrangement. That ends...
spk10: this quarter so it it shouldn't be it shouldn't be material beyond this quarter if it's even material this quarter actually okay that's helpful all right thank you yeah thanks for your question we have a final question for today uh a follow-up call from the line of Brennan Hawkin with UBS Brennan your line is live uh thanks for taking my follow-up um
spk07: I just wanted to try to drill down a little bit on the MD count because there's a few numbers around, and it's a little confusing. You touched on it to some degree before in a prior question. The investor presentation says year-end MDs of 157. Per the press release, you've added 10 MDs, 7 promotions, and then the press release also shows 160. as of now. So does the 160 include the two that have committed to joining in the coming weeks? And was there, in addition to there being some folks departing right around year end, were there also some folks departing early in the year, or was that something else?
spk08: So it's 160 today. That excludes the two that haven't arrived yet. And 157 refers to as of year end. And as far as like, you know, if you need like a whole reconciliation, let's do that offline.
spk07: Sounds good, Joe. Appreciate you taking the follow-up.
spk10: Absolutely. Thank you. We actually do have one final question that just came in. This is coming from the line of Mike Brown from KBW. Your line is live.
spk04: Great. Thanks for taking my question here. You know, most have been asked, but I guess just wanted to maybe get a little bit more color on the kind of shadow bank backlog or, you know, your pipeline, you know, the visibility that you guys have. So, kind of understanding that it sounds like it's, you know, we'll take a little time for the broad-based recovery in M&A to take form. But can you just maybe give us a quick update on what you are seeing behind the scenes? I think you, you know, sounded...
spk02: know quite bullish two months ago or so um when you characterize that pipeline so just interesting to hear how that has evolved since thank you yeah well i said uh early on the call that our actual pipeline is right near all-time highs and what's really again i i the end of the year last year between uh when the fed was late november kind of put out the this idea that you could take rate hikes off the table and just start guessing when rate cuts will begin. I think that was why I was bullish. I just felt like that's a statement that is very valuable to anybody in the deal business that you can eliminate the tail risk of a raise. Um, but you know, you do go into Christmas season. I feel like when we've gotten back to work in January, our new business review, which is where we actually determine whether we're going to take on business almost pre-Pipe, has been extremely active. So Pipe is high. New Business Review has been quality and busy. Quality deals feels like much realer. So I think it's happening right in front of us now. I think the buildup in M&A is beginning. What I do think you're going to see here a little bit is, uh you know private equity that it's very they're very sensitive to when they enter and when they exit and and try to maximize much more than a strategic will be so i do think you're going to find a little bit of uh institutions trying to attempt to time this thing exactly right um but it feels like everybody's not everybody a lot of a lot of people are stepping up to the to the starting line, and getting ready to move. That's the way it feels right now. There is a large amount of transactions that are getting positioned to move. And since I don't think the next move is a rate hike, I just think that means it's a question of when they move and not if they move.
spk04: Yeah, okay. Okay, great. That makes sense. Thank you, John. Thanks.
spk10: Thanks for your question, ladies and gentlemen. That will close our Q&A session here for today. Mr. Mullis, I'd like to turn it back over to you with any closing comments.
spk02: Well, I appreciate everybody's time. We'll see you on the next call. Thank you. Thank you.
spk10: Ladies and gentlemen, this will conclude today's Mullis & Company conference call. Have a great day. We'll see you next time.
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